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ETF Strategies to Win If Powell Enacts Rate Cuts

After a tumultuous May, Wall Street saw a sharp rebound from Jun 4 following Federal Reserve Chairman Jerome Powell’s indication that the central bank is open to a possible rate cut. Like several analysts and economists, we too believe that the U.S.-China tariff battle is a threat to the American economy as it could hurt both manufacturers and consumers. The central bank is now ready to act to keep economic expansion going if President Trump’s trade war does damage to the economy.

At the current level, according to CME FedWatch tool, there is a 47.2% chance of a 50-bp rate cut in the Sep 18 meeting, followed by a 34.1% probability of 25-bp rate cut, 12.6% likelihood of a 75-bp rate cut and only 6.1% probability of a no-rate-cut scenario.

Thanks to rate cut hopes, the Dow Jones Industrial Average rallied more than 500 points on Jun 4 followed by a 207-point jump on Jun 5. The Nasdaq which slipped into correction zone to start the month, also recoiled swiftly (read: Nasdaq Correction Zone: Short Index With These ETFs).

Against this backdrop, below we highlight a few ETF strategies that could lead to gains to investors.

Bet on Rate-Sensitive Sectors

The rate sensitive corner of the broad market – like real estate and utilities – has been an area to watch lately given the Fed’s dovish stance that has kept the rates subdued and increased the appeal for rate-sensitive stocks. Flight to safety thus pushed the benchmark U.S. treasury yield to a multi-month low. Since real-estate and utilities sectors perform better in a low-rate environment, these stocks have every reason to beat the broader market.

Momentum investing would also be a winning strategy for those seeking higher returns in a short spell. This is because the strategy looks to fetch profits from buying hot stocks that have shown an uptrend over the past few weeks or months. iShares Edge MSCI USA Momentum Factor ETF MTUM, Invesco DWA Momentum ETF PDP and SPDR Russell 1000 Momentum Focus ETF ONEO are good picks (read: Bet on Momentum ETFs & Stocks Now).

Gold Mining ETFs to Dazzle

If the Fed cuts rates further, the greenback will lose strength, which is a key positive for non-interest-bearing assets like gold and silver. SPDR Gold Shares GLD and VanEck Vectors Gold Miners ETF GDX should see a nice spell of trading in the coming days (read: Gold Mining ETFs & Stocks That Crushed the Market in May).

Be Selective on Emerging Markets

In any case, emerging market investments do well in a subdued dollar environment. But having a general view on the EM bloc is not a good idea right now with Trump targeting China and Mexico and its ripple effects being felt in other EMs (read: After China, US Hits Mexico With Tariffs: ETFs Under Threat).

Markets like Brazil and India offer good opportunities. If we go by the median of 17 forecasts from traders, brokers and strategists, Brazil’s benchmark Bovespa stock index is expected to rise 27% in 2019 to end the year at 112,000. On the other hand, India’s market will likely remain on fire thanks to the re-election of the pro-growth prime minister Narendra Modi.

Dividend Investing to Be on Tear

Just as the rates will dive, investors hunt for fixed-income will grow. At this stage, dividend investing will come to gratify investors. These are relatively safe products with solid yields that follow unique investment objectives. Top-ranked iShares Core High Dividend ETF HDV (yields 3.39% annually) and O'Shares FTSE US Quality Dividend ETF OUSA (yields 2.74% annually) are good bets in this regard.

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